This is the accessible text file for GAO report number GAO-13-630
entitled 'Troubled Asset Relief Program: Treasury's Use of Auctions to
Exit the Capital Purchase Program' which was released on July 8, 2013.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as
part of a longer term project to improve GAO products' accessibility.
Every attempt has been made to maintain the structural and data
integrity of the original printed product. Accessibility features,
such as text descriptions of tables, consecutively numbered footnotes
placed at the end of the file, and the text of agency comment letters,
are provided but may not exactly duplicate the presentation or format
of the printed version. The portable document format (PDF) file is an
exact electronic replica of the printed version. We welcome your
feedback. Please E-mail your comments regarding the contents or
accessibility features of this document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
United States Government Accountability Office:
GAO:
Report to Congressional Committees:
July 2013:
Troubled Asset Relief Program:
Treasury's Use of Auctions to Exit the Capital Purchase Program:
GAO-13-630:
GAO Highlights:
Highlights of GAO-13-630, a report to congressional committees.
Why GAO Did This Study:
CPP was established as the primary means of restoring stability to the
financial system under the Troubled Asset Relief Program (TARP). Under
CPP, Treasury invested almost $205 billion in 707 eligible financial
institutions between October 2008 and December 2009. As of May 31,
2013, 151 institutions remained in the program with under $6 billion
in outstanding investments. TARP’s authorizing legislation requires
GAO to report every 60 days on TARP activities. This report examines
(1) the extent to which Treasury has sold CPP investments through
auctions and the returns on those investments and (2) the CPP auction
process and institutions’ views on the process.
To conduct its work, GAO reviewed Treasury documents and financial
data on auction participants. GAO also interviewed officials from
Treasury and the Securities and Exchange Commission, representatives
from auction participants, and others.
What GAO Found:
The U.S. Department of the Treasury (Treasury) has increasingly used
auctions to sell its Capital Purchase Program (CPP) investments.
Initially, Treasury relied primarily on financial institutions
redeeming their shares to wind down the program. However, in March
2012 Treasury began using auctions to exit CPP, and more institutions
have exited the program through auctions than through any other method
since then. As of May 2013, Treasury has held 16 auctions, selling 128
investments for total proceeds of about $2.4 billion. Each auction has
involved the sale of an institution’s outstanding investment, also
known as the par amount. In most cases, the final sales price was
below the par amount, and in total Treasury received 84 percent of par
in the first 16 auctions. Through these auctions, repurchases, and
other mechanisms, 556 institutions had exited CPP as of May 31, 2013,
accounting for almost $223 billion in repayments and income and
exceeding the original investment amount by about $18 billion.
Figure: Total Sales Proceeds as a Percentage of Treasury’s Outstanding
Investment by Auction, as of May 31, 2013 (excludes income from
repurchases, dividends, and other sources):
[Refer to PDF for image: vertical bar graph]
Auction: 1;
Total sales proceeds: 89%.
Auction: 2;
Total sales proceeds: 89%.
Auction: 3;
Total sales proceeds: 93%.
Auction: 4;
Total sales proceeds: 82%.
Auction: 5;
Total sales proceeds: 93%.
Auction: 6;
Total sales proceeds: 80%.
Auction: 7;
Total sales proceeds: 88%.
Auction: 8;
Total sales proceeds: 90%.
Auction: 9;
Total sales proceeds: 84%.
Auction: 10;
Total sales proceeds: 80%.
Auction: 11;
Total sales proceeds: 88%.
Auction: 12;
Total sales proceeds: 65%.
Auction: 13;
Total sales proceeds: 83%.
Auction: 14;
Total sales proceeds: 65%.
Auction: 15;
Total sales proceeds: 91%.
Auction: 16;
Total sales proceeds: 92%.
Source: GAO analysis of Treasury ands SNL Financial data.
Note: Auction proceeds have accounted for $2.4 billion of the nearly
$223 billion in total program income. Program income to date exceeds
the original investment amount by about $18 billion.
[End of figure]
Treasury has structured the auctions to maximize taxpayer returns, but
representatives from some of the 13 financial institutions that
participated in the auctions told GAO that they had concerns about the
process. Treasury selected institutions for auctions based on, among
other things, the size of the institution’s CPP investment and its
dividend payment record. Treasury then notified the institutions that
their securities were going to be auctioned, and the institutions were
required to submit certain documentation to Treasury. Representatives
of some institutions, mostly from earlier auctions, told GAO that the
process was rushed and left them with limited notice to prepare the
required documentation and insufficient time to obtain regulatory
approval to bid on their own shares. Treasury officials said they
would have been willing to move an institution to a later auction if
it needed more time to prepare, and while representatives of a few
institutions that participated in later auctions felt the process was
rushed, other institutions said they had more time to prepare.
Representatives of some institutions expressed frustration that they
did not have the option to match the winning bid to retain ownership
of their shares. Treasury officials said that any changes to the
process that benefited the financial institution would make the
process less competitive for other bidders at the expense of taxpayers
and would contradict Treasury’s goal of structuring the process to
increase competition and maximize returns for taxpayers.
View [hyperlink, http://www.gao.gov/products/GAO-13-630]. For more
information, contact A. Nicole Clowers at (202) 512-8678 or
clowersa@gao.gov.
[End of section]
Contents:
Letter:
Background:
Treasury Has Increasingly Used Auctions to Wind Down CPP:
Treasury Structured Auctions to Maximize Taxpayer Return, but Some
Auction Participants Have Raised Concerns about the Process:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Office of Financial Stability:
Appendix III: GAO Contact and Staff Acknowledgments:
Figures:
Figure 1: Status of Capital Purchase Program Funds and Participants,
as of May 31, 2013:
Figure 2: Institutions Exiting the Capital Purchase Program by
Repayments and Auctions, from February 2010 to May 2013:
Figure 3: Total Sales Proceeds as a Percentage of Treasury's
Outstanding Investment (Par Amount) by Auction, as of May 31, 2013:
[End of section]
GAO:
United States Government Accountability Office:
441 G St. N.W.
Washington, DC 20548:
July 8, 2013:
Congressional Committees:
The Capital Purchase Program (CPP), the first and largest initiative
under the Troubled Asset Relief Program (TARP), provided almost $205
billion in capital to eligible financial institutions by purchasing
preferred shares and subordinated debt.[Footnote 1] In return for its
investments, the U.S. Department of the Treasury (Treasury) received
dividend or interest payments and warrants.[Footnote 2] The program
was closed to new investments on December 31, 2009, and since then
Treasury has continued to oversee and divest its CPP investments,
collect dividend and interest payments, and sell warrants. Recently
Treasury has taken steps to wind down this bank investment program
with a focus on auctioning the participating financial institutions'
preferred shares.
Under our statutorily mandated responsibilities for providing timely
oversight of TARP, we have been monitoring and providing updates on
TARP programs, including CPP.[Footnote 3] This report examines (1) the
extent to which Treasury had sold CPP investments through auctions and
the returns on those investments and (2) the CPP auction process and
institutions' views on the process.
To examine the extent to which Treasury has sold CPP investments
through auctions and the returns on those investments, we collected
data from Treasury and SNL Financial on the results of recent
auctions, including the names of participating institutions, sale
prices for the shares auctioned by Treasury, and the dollar amount of
the shares sold below par value. We assessed the reliability of the
Treasury and SNL Financial data and determined that they were
sufficiently reliable to describe the results of CPP auctions. To
review the CPP auction process, we reviewed relevant Treasury
documents and interviewed Treasury officials, individuals
knowledgeable about auctions of CPP investments, representatives of
institutions that participated in the auction process. trade
associations representing financial institutions, and officials from
the Securities and Exchange Commission (SEC). We selected
participating institutions to interview based on when the institutions
went to auction, geographic diversity, and a sample of both private
and public institutions. Appendix I contains additional information on
our scope and methodology.
We conducted this performance audit from January 2013 to July 2013 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
Background:
Created in 2008, CPP was the primary initiative under TARP to help
stabilize the financial markets and banking system by providing
capital to qualifying regulated financial institutions through the
purchase of senior preferred shares and subordinated debt.[Footnote 4]
Instead of purchasing troubled mortgage-backed securities and whole
loans, as initially envisioned under TARP, Treasury used CPP
investments to strengthen financial institutions' capital levels.
Treasury determined that strengthening capital levels was the more
effective mechanism to help stabilize financial markets, encourage
interbank lending, and increase confidence in lenders and investors.
Treasury anticipated that strengthening the capital positions of the
financial institutions would enhance confidence in the institutions
themselves and the financial system overall and increase the
institutions' capacity to undertake new lending and support the
economy. On October 14, 2008, Treasury allocated $250 billion of the
original $700 billion in overall TARP funds for CPP. The allocation
was subsequently reduced in March 2009 to reflect lower estimated
funding needs, as evidenced by actual participation rates. The program
was closed to new investments on December 31, 2009. The Office of
Financial Stability was established within Treasury to implement TARP
in consultation with federal banking regulators.
Under CPP, qualified financial institutions were eligible to receive
an investment of between 1 and 3 percent of their risk-weighted
assets, up to a maximum of $25 billion.[Footnote 5] In exchange for
the investment, Treasury generally received senior preferred shares
that would pay dividends at a rate of 5 percent annually for the first
5 years and 9 percent annually thereafter.[Footnote 6] Treasury was
also required to receive warrants to purchase shares of common or
preferred stock or a senior debt instrument to further protect
taxpayers and help ensure returns on the investments. Institutions are
allowed to repay CPP investments with the approval of their primary
federal bank regulator and afterward to redeem warrants.
Nine major financial institutions were initially included in CPP
because Treasury and the federal banking regulators considered them
essential to the operation of the financial system.[Footnote 7] At the
time, these nine institutions held about 55 percent of U.S. banking
assets and provided a variety of services, including retail,
wholesale, and investment banking and custodial and processing
services. According to Treasury officials, the nine financial
institutions agreed to participate in CPP in part to signal the
program's importance to the stability of the financial system.
Initially, Treasury approved $125 billion in total capital purchases
for these institutions and completed the transactions with eight of
them on October 28, 2008, for a total of $115 billion. The remaining
$10 billion was disbursed after the merger of Bank of America
Corporation and Merrill Lynch & Co., Inc. was completed in January
2009. Treasury ultimately disbursed about $205 billion to 707
financial institutions through December 2009. Participating
institutions began repaying their investments and exiting CPP in early
2009.
In May 2012, Treasury announced a strategy to wind down its remaining
investments. Treasury's strategy includes three options that,
according to Treasury officials, aim to protect taxpayer interests,
promote financial stability, and preserve the strength of the nation's
community banks. Treasury's options include (1) repayments, (2)
restructurings, and (3) auctions. According to Treasury officials,
Treasury conducts analyses to determine which option is most
appropriate for a particular institution.
* Repayments allow financial institutions, with the approval of their
regulators, to redeem their preferred shares in full. Treasury noted
that institutions have the legal right to do this at any time. A
majority of institutions have exited the program in this manner since
2009, and Treasury expected some financial institutions to continue to
use it through late 2013. Under this option, Treasury's ability to
exit the program largely depends on the ability of institutions to
repay their investments. In particular, institutions must demonstrate
that they are financially strong enough to repay the CPP investments
in order to receive regulatory approval to exit the program. Dividend
rates will increase from 5 percent to 9 percent for remaining
institutions beginning in late 2013, a development that may prompt
institutions to repay their investments. If broader interest rates are
low, especially approaching the dividend reset, the financial
institutions could have further incentive to redeem their preferred
shares. Treasury intends to continue using the repayment option for
institutions that it believes are capable of redeeming all shares in
full in the near future, but Treasury officials said that the number
of such institutions was declining.
* Restructurings allow troubled financial institutions to restructure
their investments, and all restructurings require new capital --for
example, from a merger. With this option, Treasury receives cash or
other securities that generally can be sold more easily than preferred
stock, but Treasury's investments are sometimes sold at a discount. As
such, Treasury has used restructurings as a means of winding down CPP
investments only on a limited basis. Although Treasury officials
expect a limited number of restructurings to continue, they told us
that they would approve the sales only if the terms represented the
best deal for taxpayers.
* Auctions allow Treasury to sell its preferred stock. Treasury
conducted the first auction of CPP investments in March 2012 and
reported that it generated strong investor interest. Treasury also
reported that this option could be beneficial for community banks that
did not have easy access to the capital markets, because it could
attract new, private capital to replace the temporary TARP support.
Treasury expects this option to continue to be part of its effort to
wind down CPP. Thus far, Treasury has sold investments individually
but noted that it might combine other investments, particularly
smaller investments, into pooled auctions. Unlike Treasury's recent
auctions of individual CPP preferred stock investments, in which
multiple bidders were allocated portions of the preferred stock at a
single clearing price, Treasury anticipates that the pooled auctions
will result in a single highest bidder purchasing all of the
securities included in the pool. Whether Treasury sells stock
individually or in pools, the outcome of this option will depend
largely on investor demand for these securities.
In considering these options, we have previously noted that Treasury
will need to balance the goals of protecting taxpayer-supported
investments while expeditiously unwinding the program.[Footnote 8]
Treasury officials said that they would continue to evaluate the CPP
exit strategy but added that they expected to continue using these
options for the foreseeable future.
As of May 31, 2013, Treasury had received $222.6 billion in repayments
and income, exceeding the $204.9 billion originally disbursed by
almost $18 billion (see figure 1).[Footnote 9] Further, 556
institutions had exited CPP as of May 31, 2013, including 212
institutions that exited by fully repaying their CPP investments, 128
that participated in auctions, and 165 that refinanced their
investments through other federal programs.[Footnote 10] The $222.6
billion in total proceeds includes $193.5 billion in repayments; $2.4
billion in auction sales of original CPP investments; $18.9 billion in
dividends, interest, and other income; and $7.9 billion in warrants
sold. After accounting for write-offs and realized losses totaling
$3.4 billion, CPP had $5.6 billion in outstanding investments as of
May 31, 2013.
Figure 1: Status of Capital Purchase Program Funds and Participants,
as of May 31, 2013:
[Refer to PDF for image: horizontal bar graph and pie-chart]
Status of funding:
Disbursed: $204.9 billion;
Repayments: $193.5 billion;
Auction proceeds: $2.4 billion;
Dividends/interest/other income: $18.9 billion;
Warrant income: $7.9 billion;
Total proceeds: $222.6 billion.
Write-offs and losses: $3.4 billion;
Outstanding investments: $5.6 billion;
Estimated lifetime income: $15.7 billion.
Status of participants:
Investments fully repaid: 212;
Investments refinanced through other federal programs: 165;
Investments sold through auction: 128;
Other: 51;
Institutions remaining in program: 151.
Source: GAO analysis of Treasury data.
Note: Treasury estimates its lifetime income on a quarterly basis
using the aggregate value of investments at market prices in
conjunction with the Office of Management and Budget and publishes
them in its monthly reports to Congress. The amount of estimated
lifetime income is as of March 31, 2013.
[End of figure]
Treasury Has Increasingly Used Auctions to Wind Down CPP:
Treasury has increasingly used the auction option after the first sale
of CPP securities in March 2012 received investor interest. Through
February 2012, 148 institutions had exited CPP by redeeming their
preferred shares in full. As figure 2 shows, from March 2012--the
month of Treasury's first auction--through May 2013, 64 institutions
exited by redeeming their investments while 128 institutions exited
through 16 auctions.[Footnote 11]
Figure 2: Institutions Exiting the Capital Purchase Program by
Repayments and Auctions, from February 2010 to May 2013:
[Refer to PDF for image: vertical bar graph]
Number of institutions:
Date: February 2010;
Repaid: 4;
Auctioned: 0.
Date: March 2010;
Repaid: 4;
Auctioned: 0.
Date: April 2010;
Repaid: 4;
Auctioned: 0.
Date: May 2010;
Repaid: 1;
Auctioned: 0.
Date: June 2010;
Repaid: 5;
Auctioned: 0.
Date: July 2010;
Repaid: 2;
Auctioned: 0.
Date: August 2010;
Repaid: 2;
Auctioned: 0.
Date: September 2010;
Repaid: 0;
Auctioned: 0.
Date: October 2010;
Repaid: 0;
Auctioned: 0.
Date: November 2010;
Repaid: 4;
Auctioned: 0.
Date: December 2010;
Repaid: 16;
Auctioned: 0.
Date: January 2011;
Repaid: 4;
Auctioned: 0.
Date: February 2011;
Repaid: 1;
Auctioned: 0.
Date: March 2011;
Repaid: 7;
Auctioned: 0.
Date: April 201;
Repaid: 2;
Auctioned: 0.
Date: May 2011;
Repaid: 2;
Auctioned: 0.
Date: June 2011;
Repaid: 2;
Auctioned: 0.
Date: July 2011;
Repaid: 5;
Auctioned: 0.
Date: August 2011;
Repaid: 3;
Auctioned: 0.
Date: September 2011;
Repaid: 0;
Auctioned: 0.
Date: October 2011;
Repaid: 4;
Auctioned: 0.
Date: November 2011;
Repaid: 4;
Auctioned: 0.
Date: December 2011;
Repaid: 8;
Auctioned: 0.
Date: January 2012;
Repaid: 4;
Auctioned: 0.
Date: February 2012;
Repaid: 2;
Auctioned: 0.
Date: March 2012;
Repaid: 5;
Auctioned: 6.
Date: April 2012;
Repaid: 7;
Auctioned: 0.
Date: May 2012;
Repaid: 0;
Auctioned: 0.
Date: June 2012;
Repaid: 4;
Auctioned: 14.
Date: July 2012;
Repaid: 4;
Auctioned: 11.
Date: August 2012;
Repaid: 3;
Auctioned: 4.
Date: September 2012;
Repaid: 4;
Auctioned: 5.
Date: October 2012;
Repaid: 3;
Auctioned: 11.
Date: November 2012;
Repaid: 8;
Auctioned: 26.
Date: December 2012;
Repaid: 10;
Auctioned: 14.
Date: January 2013;
Repaid: 2;
Auctioned: 10.
Date: February 2013;
Repaid: 3;
Auctioned: 14.
Date: March 2013;
Repaid: 2;
Auctioned: 5.
Date: April 2013;
Repaid: 6;
Auctioned: 8.
Date: May 2013;
Repaid: 3;
Auctioned: 0.
Source: GAO analysis of Treasury and SNL Financial data.
Note: CPP participants began repaying their investments in early 2009,
and as of January 31, 2010, 58 participants had made full repayments.
[End of figure]
Each auction involved the sale of an institution's outstanding CPP
investment, also known as the par amount. In most cases, the final
sales price for an institution's shares was below the par amount. In
particular, the $2.4 billion in total proceeds from the 16 auctions to
date--from March 2012 through April 2013--represents 84 percent of the
$2.9 billion principal investment in the institutions.[Footnote 12]
For each round of auctions, the percentage of par amount that Treasury
received ranged from 65 percent in the 12th auction to 93 percent in
the 5th auction (see figure 3). Out of all institutions that
participated in these 16 auctions, final sales prices for individual
institutions ranged from 17 percent to 131 percent of par. Treasury
officials said that the auction results reflected the potential risk
associated with the liquidity of the investment and the credit quality
of the financial institutions, including their ability to make future
dividend or interest payments, as well as the prospect of receiving
previous missed payments that had accrued. For example, later auctions
tended to include smaller institutions with more cumulative missed
payments. In a few cases, the prospect of recouping these missed
payments made them particularly attractive to investors and helped a
number of institutions to sell shares at above their par value.
Although Treasury has not generally recouped its full investment in
individual institutions through the auctions, Treasury officials told
us that accepting a discount and transferring ownership of these
institutions to the private sector was in the best interest of the
taxpayer. Because of the inherent risk factors of these institutions,
Treasury officials did not believe that these institutions would be
able to make full repayments in the near future. The officials added
that had they chosen not to auction these positions, their values
could have decreased later. Treasury officials also said that while
auctions were generally priced at a discount to par, the prices were
generally equal to or above Treasury's internal valuations.
Figure 3: Total Sales Proceeds as a Percentage of Treasury's
Outstanding Investment (Par Amount) by Auction, as of May 31, 2013:
[Refer to PDF for image: vertical bar graph]
Auction: 1;
Total sales proceeds: 89%.
Auction: 2;
Total sales proceeds: 89%.
Auction: 3;
Total sales proceeds: 93%.
Auction: 4;
Total sales proceeds: 82%.
Auction: 5;
Total sales proceeds: 93%.
Auction: 6;
Total sales proceeds: 80%.
Auction: 7;
Total sales proceeds: 88%.
Auction: 8;
Total sales proceeds: 90%.
Auction: 9;
Total sales proceeds: 84%.
Auction: 10;
Total sales proceeds: 80%.
Auction: 11;
Total sales proceeds: 88%.
Auction: 12;
Total sales proceeds: 65%.
Auction: 13;
Total sales proceeds: 83%.
Auction: 14;
Total sales proceeds: 65%.
Auction: 15;
Total sales proceeds: 91%.
Auction: 16;
Total sales proceeds: 92%.
Source: GAO analysis of Treasury ands SNL Financial data.
Note: Each round of auctions included multiple institutions whose
assets were sold separately, and the bars represent total proceeds
from all institutions in each round of auctions. For individual
institutions, final sales prices ranged from 17 percent to 131 percent
of par.
[End of figure]
According to representatives from some financial institutions that
participated in the auctions, there are many reasons for seeking to
exit CPP, including through the auction process. In particular,
representatives from several institutions told us that compensation
restrictions provided a strong incentive to exit. That is, as a
condition of receiving TARP assistance, the financial institutions
must meet a number of requirements related to incentive and bonus
compensation arrangements for senior executive officers.
Representatives from other institutions told us that there was a
stigma associated with remaining in the program. As we have reported,
Treasury officials said that the public's negative opinion of TARP
curtailed overall interest and participation in the program.[Footnote
13] Representatives from some institutions also said that the
impending increase in the dividend rate from 5 percent to 9 percent
provided a strong incentive to redeem the shares if the institution
was able to do so.
Treasury has stated that the auction process could be beneficial for
financial institutions that do not have easy access to the capital
markets, because the auctions could attract new private capital to
replace the temporary TARP support. Further, representatives from some
financial institutions told us that they agreed that the auction had
helped them exit CPP sooner than they could have otherwise.
Representatives from other institutions told us that access to capital
markets was not a major factor in their plans for exiting CPP, as they
could have independently raised the capital.
Treasury Structured Auctions to Maximize Taxpayer Return, but Some
Auction Participants Have Raised Concerns about the Process:
Treasury began planning its auctions in November 2011 by hiring a
contractor to help assess its exit strategy for CPP. Among other
things, the company assisted Treasury in reaching out to institutions
to determine if they had the intent and ability to redeem their
preferred shares in the near future. For those institutions that would
not be redeeming in the near future, Treasury, with the company's
assistance, later contacted them to discuss the auction process.
Treasury held the first "pilot" auction in March 2012 to determine
investor interest in CPP securities. Of the remaining institutions,
Treasury said that it selected for this auction the preferred stocks
of six financial institutions that had existing effective shelf
registration statements and whose assets could thus be auctioned most
quickly.[Footnote 14] Treasury officials said that they focused on the
shares of those institutions in order to test the efficacy of the
auction process.
In May 2012, Treasury outlined its strategy for winding down CPP,
citing the auction option as one that would help a number of
institutions exit the program. Treasury, with assistance from its
contractor, began by assessing the financial institutions that
remained in CPP to determine their suitability for individual
auctions. Treasury officials said that it used a number of criteria to
make this determination including the size of the institution's CPP
investment, the existence of an effective shelf registration, and the
institution's record of paying its dividends.[Footnote 15] For the
initial auctions, Treasury selected larger, publicly traded
institutions that were up to date on their dividend payments. For
example, 17 of the 20 institutions participating in the first three
auctions had over $1 billion in assets. Furthermore, four of the first
five auctions included only publicly held institutions.
After selecting the institutions, Treasury notified them that they
would be part of an upcoming auction, and the institutions then had to
assemble and submit documentation to Treasury. Documentation
requirements were based on the nature of the offering. For example,
publicly traded institutions selected for auctions had to submit a
prospectus supplement and an underwriting agreement. Further,
privately held institutions had to submit a placement agency agreement
that included a number of disclosures relating to capital levels and
dividend payment history. If an institution wanted to bid on its own
shares in the auction it also needed to get approval from its primary
federal regulator. In the days before the auction, Treasury notified
potential investors by issuing a press release of the institutions
that were to be auctioned. Treasury used a modified Dutch auction
process, which established a market price by allowing investors to
submit bids at specified increments above a minimum price that was
specified for each auction.[Footnote 16] After the auctions closed,
Treasury published the results in press releases.
In the 16 auctions to date, Treasury sold multiple, individual CPP
investments at each auction. In particular, multiple bidders were
allocated portions of the preferred stock at a single clearing price
for each institution. However, in June 2012 Treasury notified about
200 financial institutions that it was considering including them as
part of a series of pooled auctions that were to begin in the fall of
2012. Treasury began considering pooled auctions for the positions--
which were smaller than the previously auctioned positions--out of
concern that Treasury might not be able to generate sufficient
interest in these positions individually to conduct a competitive
auction. Treasury anticipates that pooled auctions will result in a
single highest bidder purchasing all of the securities of all
institutions included in the pool. Treasury offered these financial
institutions the opportunity to opt out of the pooled auction by
submitting an "opt-out" bid to repurchase all of their outstanding CPP
securities. Treasury also provided these institutions with the option
of arranging for a designated bidder to repurchase their shares at
auction, giving the institutions an additional opportunity to avoid
the possibility of gaining new unfamiliar shareholders.[Footnote 17]
If the institution's or its designated bidder's bid met a minimum
price level set by Treasury, Treasury would remove the institution
from the potential pooled auction and schedule it for an individual
auction or other sale later. However, Treasury advised the
institutions that a decision to remove them from a pooled auction did
not mean that the institutions, or their designated bidders, were
entitled to purchase the investment at the submitted bid price.
Further, Treasury told institutions that it would determine at a later
date whether to conduct an individual auction or use another mechanism
to recoup its investments. Treasury originally set the deadline for
submitting the opt-out bid in August 2012. However, after receiving
feedback that some institutions needed more time to obtain approval
from their regulators, it extended the deadline to October 2012 and
later extended it again to April 2013. Treasury began including
institutions that had opted out of a potential pooled auction in the
seventh auction, which occurred in October 2012. As of June 2013,
Treasury had not scheduled any pooled auctions.
Representatives from financial institutions with whom we spoke had
varied experiences with the auction process and some cited a number of
concerns with the process, including the following.[Footnote 18]
* Timing and organization of the process. Representatives from many of
the 13 financial institutions with whom we spoke--particularly those
that had participated in some of the earlier auctions--thought that
the process of preparing for the auction was rushed, was not well
organized, and did not have clear instructions. In particular,
representatives from multiple institutions that we interviewed said
that they had about 3 weeks from the time they were contacted by
Treasury to prepare and submit documentation for the auction.
According to some of these representatives, this amount of time was
not sufficient to get regulatory approval to bid on their own shares.
Representatives from many of the institutions that we interviewed also
told us that the process was frustrating because Treasury did not
provide clear guidance for preparing documentation and disclosures,
causing them to incur significant expenses--cited as ranging from
$50,000 to $300,000 among the institutions we interviewed--to hire
lawyers and accountants to prepare documentation. In contrast, while
representatives from a few institutions that participated in later
auctions felt the process was rushed, others told us that they had
much more time to prepare for their auctions--up to 10 months in some
cases.
Treasury officials told us that they began reaching out to potential
auction participants in July 2011 to determine their plans for exiting
CPP and discuss the potential auctions. Although Treasury did not
begin discussing specific documentation requirements until it notified
a financial institution that it was scheduled for a particular
upcoming auction, Treasury officials said that they would have been
willing to move an institution that need more time to prepare to a
later. Finally, Treasury officials said that they would not expect the
auction process to be consistent for all auction participants, as a
number of factors could affect the amount of time an institution
needed to prepare for an auction. For example, institutions wishing to
bid on their own shares at auction would require additional time to
obtain regulatory approval compared to institutions that did not plan
to submit their own bids.
* Use of opt-out bid. Representatives from some institutions we
interviewed expressed frustration that Treasury used the institution's
opt-out bid as the minimum bid for the auctions. According to
representatives from many of the financial institutions with whom we
spoke that had opted out of the pooled auction process, they were
surprised that their opt-out bid was used as the floor price in the
auction process. These representatives said that Treasury did not tell
them that their opt-out bid would be used as a floor price and that
they only found out when the auction began. Representatives from one
institution told us that Treasury did not notify them of this practice
but that they discovered it from other institutions that had already
gone to auction. Many of the representatives said they would have
submitted a higher bid in order to win the auction and retain
ownership if they had known that the opt-out bid would be used this
way.
According to Treasury officials, financial institutions selected for
the pooled auctions would generally have a more difficult time being
sold individually at an auction, and the purpose of the minimum price,
which Treasury sets, is to ensure that any bids submitted at auction
would be at prices acceptable to Treasury. Treasury officials noted
that the opt-out bid may be the minimum price for an auction, and that
Treasury retains full discretion to determine what the minimum price
should be. The officials also said that the minimum price was
disclosed at the beginning of each auction and that Treasury notified
institutions that intended to bid on their own shares prior to the
auction so that the institution can finalize disclosure documents.
Treasury officials said that in the event that the clearing price was
equal to the opt-out price, the institution (or its designated bidder,
if applicable) would win all of its shares. Treasury officials also
said that all institutions had the option at auction to submit a bid
above the minimum price and that many institutions had done so.
Finally, Treasury officials said that any changes to the process that
benefit the financial institution would make the process less
competitive for other bidders at the expense of taxpayers.
* Disclosure requirement. Representatives from some publicly traded
financial institutions with whom we spoke expressed frustration over
SEC's requirement that they publicly disclose their intent to bid on
their own shares and the amount of capital they raised to do so.
Representatives from these institutions--which had internal, nonpublic
information available to them--said that this disclosure requirement
signaled to other bidders that the shares were an attractive
investment, raising the prices. Some financial institution
representatives also felt that they were at a disadvantage because the
other bidders knew, through the disclosure required by SEC, the amount
of capital the participant had available for bidding on its shares.
Conversely, the financial institutions had no knowledge about the
capital available to the other potential bidders. While the
disclosures may have resulted in higher returns to Treasury,
representatives from some of these institutions said the disclosures
put them at a disadvantage compared to the other bidders. According to
SEC officials, the purpose of the disclosure was to protect investors
by alerting them to the fact that the clearing price for the
securities offered in the auction could be affected by the
institution's bids. The officials also said that this information was
particularly relevant because even assuming the institution has
disclosed all material, non-public information to investors, the
institution is always better informed about its performance and
prospects than any bidder or other third party.
* No matching bids. A number of financial institutions told us that
they would have preferred the option of matching the winning bid to be
able to retain ownership of their shares. However, Treasury officials
said that changes to the process benefiting the financial institutions
would make the process less competitive to potential bidders and less
beneficial for the taxpayer. In particular, Treasury officials said
that giving the institution the right to match the winning bid would
make other bidders less competitive, and could, in turn, discourage
potential bidders from participating.
Some of the concerns with the auction process cited by auction
participants with whom we spoke may have been caused by a difference
in motivations. According to a banking association, banks generally
like to retain ownership. Treasury officials said that their goal was
to create a competitive and transparent process that would maximize
returns to taxpayers. Treasury said that the auctions had been
successful in helping Treasury to wind down CPP and transfer ownership
of the preferred shares to the private sector.
Agency Comments and Our Evaluation:
We provided a draft of this report to Treasury for its review and
comment. Treasury provided written comments that we have reprinted in
appendix II. In its written comments, Treasury noted that the report
provided a helpful overview of its strategy to wind down CPP. It also
noted that Treasury had realized a positive return of $17.8 billion on
its CPP investments as of June 28, 2013, and that 143 institutions
remained in the program representing a remaining investment of $5.5
billion. Treasury also emphasized TARP's effectiveness in preventing a
collapse of the financial system and in restarting economic growth.
We are sending copies of this report to the Financial Stability
Oversight Board, the Special Inspector General for TARP, interested
congressional committees and members, and Treasury. The report also is
available at no charge on the GAO website at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact A. Nicole Clowers at (202) 512-8678 or clowersa@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. GAO staff who
made major contributions to this report are listed in appendix III.
Signed by:
A. Nicole Clowers:
Director:
Financial Markets and Community Investment:
List of Addressees:
The Honorable Barbara Mikulski:
Chairwoman:
The Honorable Richard C. Shelby:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Tim Johnson:
Chairman:
The Honorable Mike Crapo:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Patty Murray:
Chairman:
The Honorable Jeff Sessions:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Orrin G. Hatch:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Hal Rogers:
Chairman:
The Honorable Nita Lowey:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable Paul Ryan:
Chairman:
The Honorable Chris Van Hollen:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Jeb Hensarling:
Chairman:
The Honorable Maxine Waters:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Dave Camp:
Chairman:
The Honorable Sander Levin:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The objectives of our report were to assess (1) the extent to which
Treasury had sold Capital Purchase Program (CPP) investments through
auctions and the returns on those investments; and (2) the CPP auction
process and institutions' views on the process. To assess Treasury's
wind-down strategy for CPP, we reviewed Treasury press releases and
interviewed Treasury officials on their auction implementation
strategy. To analyze the auction results, we reviewed data from
Treasury and SNL Financial--a private company that maintains a
database of information from publicly filed regulatory and financial
reports--on the results of recent auctions. The data included
information on the names of participating institutions, the par value
of shares sold at auction, and the sale prices for the shares, among
other things. To obtain institutions' views on the process, we
interviewed representatives of 13 institutions that had participated
in the auction process. In selecting participating institutions to
interview, we sought representation from participants in early as well
as more recent auctions, geographic diversity, and a balance of both
private and public institutions. While we selected a diverse group of
auction participants to interview, their statements reflect their
specific experiences and should not be generalized to reflect the
views of all auction participants. We also interviewed individuals
knowledgeable about the CPP auction process, representatives from
trade associations for financial institutions, and officials from the
Securities and Exchange Commission.
We determined that the CPP program data from Treasury were
sufficiently reliable to assess the status of the program and the
results of CPP auctions. For example, we tested the Office of
Financial Stability's internal controls over financial reporting as
they related to our annual audit of the office's financial statements
and found the information to be sufficiently reliable based on the
results of our audits of fiscal years 2009, 2010, 2011, and 2012
financial statements for TARP.[Footnote 19] We also compared
Treasury's auction data to comparable data from SNL Financial and
accounted for any differences. We assessed the reliability of SNL
Financial data as part of previous studies and found the data to be
reliable for the purposes of our review. We verified that no changes
had been made that would affect the data's reliability.
We conducted this performance audit from January 2013 to July 2013 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Comments from the Office of Financial Stability:
Department of The Treasury:
Assistant Secretary:
Washington, D.C.
June 28, 2013:
A. Nicole Clowers:
Director:
Financial Markets and Community Investment:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Ms. Clowers:
I am writing in response to your draft report regarding the Capital
Purchase Program (CPP), entitled, Troubled Asset Relief Program:
Treasury's Use of Auctions to Exit the Capital Purchase Program (Draft
Report). The Department of the Treasury (Treasury) appreciates the
efforts of the Government Accountability Office (GAO), and this letter
provides our official comments to the Draft Report.
The Draft Report provides a helpful overview of Treasury's three-
pronged strategy to wind down CPP, which involves: (1) waiting for
repayments from those banks who can repay the TARP investment in full
in the near future, (2) selling through competitive auctions
investments in banks that cannot repay in the near future, and (3)
restructuring some investments, typically in connection with a merger
or infusion of new capital, if the same represents the best option for
the taxpayer. As of today, Treasury has recovered $222.7 billion on an
initial CPP investment of $204.9 billion – representing a gain of
$17.8 billion. Only 143 of the 707 original CPP participants are still
in the program, representing a remaining Treasury investment of only
$5.5 billion.
The recovery for CPP is similar to the situation with respect to all
the TARP bank programs as well as TARP as a whole. For all TARP
programs, we have collected $400 billion against disbursements of $420
billion. And, for the TARP investment programs as a whole—that is,
excluding disbursements for housing, which were never meant to be
recovered, and including all investments made in banks, the auto
industry, the credit markets, and AIG—Treasury invested a total of
$412 billion and has collected over $417 billion, if one includes the
proceeds of all Treasury's shares in AIG.
While it is good news that we are continuing to wind-down the
investment programs quickly and, in almost all cases, at a gain to the
taxpayer, the most important measure of success is that these programs
were effective in helping to prevent the collapse of the financial
system and in restarting economic growth. While there is still more
work to be done, it is clear that the damage to our economy would have
been far worse, and the costs far greater without the government's
forceful response. And, to mitigate the risks in the future, we are
putting in place a comprehensive set of reforms to make the financial
system safer and stronger.
Treasury values GAO's review of the CPP wind down process and looks
forward to continuing to work with you and your team as we move
forward.
Sincerely,
Signed by:
Timothy G. Massad:
Assistant Secretary for Financial Stability:
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
A. Nicole Clowers, (202) 512-8678 or clowersa@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Karen Tremba (Assistant
Director), Christopher Forys, Michael Mikota, Emily Chalmers, William
Chatlos, Marc Molino, and Patricia Moye made significant contributions
to this report.
[End of section]
Footnotes:
[1] As authorized by the Emergency Economic Stabilization Act of 2008
(EESA), Pub. L. No. 110-343, 122 Stat. 3765 (2008), codified at 12
U.S.C. §§ 5201 et seq. EESA, which was signed into law on October 3,
2008, established the Office of Financial Stability within the
Department of the Treasury and provided it with broad, flexible
authorities to buy or guarantee troubled mortgage-related assets or
any other financial instruments necessary to stabilize the financial
markets.
[2] A warrant is an option to buy shares of common stock or preferred
stock at a predetermined price on or before a specified date.
[3] We must report at least every 60 days on findings resulting from
oversight of TARP's performance in meeting the purposes of EESA, the
financial condition and internal controls of TARP, the characteristics
of both asset purchases and the disposition of assets acquired, TARP's
efficiency in using the funds appropriated for the program's
operation, TARP's compliance with applicable laws and regulations, and
other matters. 12 U.S.C. § 5226(a). See, for example, GAO, Capital
Purchase Program: Status of the Program and Financial Health of
Remaining Participants, [hyperlink,
http://www.gao.gov/products/GAO-13-458] (Washington, D.C.: May 7,
2013), Capital Purchase Program: Revenues Have Exceeded Investments,
but Concerns about Outstanding Investments Remain, [hyperlink,
http://www.gao.gov/products/GAO-12-301] (Washington, D.C.: Mar. 8,
2012), and Troubled Asset Relief Program: Opportunities Exist to Apply
Lessons Learned from the Capital Purchase Program to Similarly
Designed Programs and to Improve the Repayment Process, [hyperlink,
http://www.gao.gov/products/GAO-11-47] (Washington, D.C.: Oct. 4,
2010).
[4] For purposes of CPP, qualifying financial institutions generally
include stand-alone U.S.-controlled banks and savings associations, as
well as bank holding companies and most savings and loan holding
companies.
[5] Risk-weighted assets are all assets and off-balance-sheet items
held by an institution, weighted for risk according to the federal
banking agencies' regulatory capital standards. In May 2009, Treasury
increased the maximum amount of CPP funding that small financial
institutions (qualifying financial institutions with total assets of
less than $500 million) could receive from 3 to 5 percent of risk-
weighted assets.
[6] Some other types of institutions, such as S corporations, received
their CPP investment in the form of subordinated debt and pay Treasury
interest rather than dividends Treasury received subordinated debt
rather than preferred shares in order to preserve these institutions'
special tax status. The U.S. Internal Revenue Code prohibits S
corporations from having more than one class of stock outstanding.
Interest rates for this debt are 7.7 percent for the first 5 years and
13.8 percent for the remaining years.
[7] The nine major financial institutions were Bank of America
Corporation; Citigroup, Inc.; JPMorgan Chase & Co.; Wells Fargo &
Company; Morgan Stanley; The Goldman Sachs Group, Inc.; The Bank of
New York Mellon Corporation; State Street Corporation; and Merrill
Lynch & Co., Inc.
[8] See GAO, Troubled Asset Relief Program: Treasury Sees Some Returns
as It Exits Programs and Continues to Fund Mortgage Programs,
[hyperlink, http://www.gao.gov/products/GAO-13-192] (Washington, D.C.:
Jan. 7, 2013).
[9] Treasury, Troubled Asset Relief Program (TARP) Monthly Report to
Congress - May 2013 (June 10, 2013).
[10] Of the 165 institutions, 28 exited through the Community
Development Capital Initiative, and 137 exited through the Small
Business Lending Fund. Additionally, 25 institutions went into
bankruptcy or receivership, 22 had their investments sold by Treasury,
and 4 merged with another institution. Further, 11 institutions have
made partial repayments but remain in the program.
[11] Treasury conducted its 17th auction in June 2013, resulting in
the sale of investments in six institutions. We did not include this
auction in our analysis because it occurred after we had concluded our
audit work.
[12] According to Treasury officials, Treasury's total receipts from
the 128 financial institutions that exited CPP through auctions--which
includes auction proceeds as well as warrant proceeds and dividends--
is slightly greater than Treasury's $2.9 billion principal investment
in these institutions.
[13] See GAO, Troubled Asset Relief Program: Status of Programs and
Implementation of GAO Recommendations, [hyperlink,
http://www.gao.gov/products/GAO-11-74] (Washington, D.C.: Jan. 12,
2011).
[14] A shelf registration, under SEC Rule 415, exists when, in certain
situations, a corporation can file a registration statement and wait
up to 3 years until the public offering takes place, as long as it has
filed all required reports in a timely manner.
[15] Dividend or interest payments are due on a quarterly basis, but
institutions can elect whether to pay dividends and may choose not to
pay for a variety of reasons. For example, the institution or its
federal and state regulators may decide not to pay dividends to
conserve cash and maintain (or increase) capital levels. However,
unpaid cumulative dividends generally accrue and the institution must
pay them before making payments to other types of shareholders, such
as holders of common stock.
[16] A Dutch auction is a method for pricing shares whereby the price
of the shares offered is lowered until there are enough bids to sell
all the shares. All shares are sold at that price. Modified Dutch
auctions usually have a certain lower limit that the auctioneer cannot
go below and are used mainly when a quick sale is required. Treasury
had previously used Dutch auctions to sell its CPP warrants.
[17] As part of the pooled auction process, Treasury gave the
financial institutions the option of designating a single outside
investor, or single group of investors, to make a bid to purchase all
the institution's outstanding CPP securities. Similar to bidding on
its own shares, an institution using a designated bidder had to obtain
approval from its primary federal regulator.
[18] While we selected a diverse group of auction participants to
interview, their statements reflect their specific experiences and
should not be generalized to reflect the views of all auction
participants.
[19] See GAO, Financial Audit: Office of Financial Stability (Troubled
Asset Relief Program) Fiscal Years 2012 and 2011 Financial Statements,
[hyperlink, http://www.gao.gov/products/GAO-13-126R] (Washington,
D.C.: Nov. 9, 2012); Financial Audit: Office of Financial Stability
(Troubled Asset Relief Program) Fiscal Years 2011 and 2010 Financial
Statements, [hyperlink, http://www.gao.gov/products/GAO-12-169]
(Washington, D.C.: Nov.10, 2011); Financial Audit: Office of Financial
Stability (Troubled Asset Relief Program) Fiscal Years 2010 and 2009
Financial Statements, [hyperlink,
http://www.gao.gov/products/GAO-11-174] (Washington, D.C.: Nov.15,
2010); and Financial Audit: Office of Financial Stability (Troubled
Asset Relief Program) Fiscal Year 2009 Financial Statements,
[hyperlink, http://www.gao.gov/products/GAO-10-301] (Washington, D.C.:
Dec. 9, 2009).
[End of section]
GAO’s Mission:
The Government Accountability Office, the audit, evaluation, and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the
performance and accountability of the federal government for the
American people. GAO examines the use of public funds; evaluates
federal programs and policies; and provides analyses, recommendations,
and other assistance to help Congress make informed oversight, policy,
and funding decisions. GAO’s commitment to good government is
reflected in its core values of accountability, integrity, and
reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO’s website [hyperlink, http://www.gao.gov]. Each
weekday afternoon, GAO posts on its website newly released reports,
testimony, and correspondence. To have GAO e-mail you a list of newly
posted products, go to [hyperlink, http://www.gao.gov] and select
“E-mail Updates.”
Order by Phone:
The price of each GAO publication reflects GAO’s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black
and white. Pricing and ordering information is posted on GAO’s
website, [hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
Connect with GAO:
Connect with GAO on facebook, flickr, twitter, and YouTube.
Subscribe to our RSS Feeds or E mail Updates. Listen to our Podcasts.
Visit GAO on the web at [hyperlink, http://www.gao.gov].
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Website: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm];
E-mail: fraudnet@gao.gov;
Automated answering system: (800) 424-5454 or (202) 512-7470.
Congressional Relations:
Katherine Siggerud, Managing Director, siggerudk@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, DC 20548.
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, DC 20548.
[End of document]